Card Tricks: Credit vs. Debit Cards

Credit card or debit card? An interesting battle.

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Okay. The bill comes at a restaurant or at the store that you are purchasing your new boots from, what do you reach for, your credit card or your debit card? Hey, I often still reach for cash. But I’m an old timer who still uses a BlackBerry. Let’s be honest, few of you will follow my cash lead. So, again, credit or debit?

And here we’re going to give credit cards and their users the benefit of the doubt. We’re going to assume the balance is paid off fully every month woohoo. So it must be credit cards, right? C’mon Dave. Well, certainly credit cards have some legit benefits. Rewards—cash back, travel points or loyalty points.

What’s not to love? Plus, you get a short-term interest-free loan as when you pay with a credit card, you get a grace period to pay without interest. Also, responsible use of a credit card can help build your credit history and, therefore, help your credit score. Hmm, tons of positives. And to repeat, we’re assuming you’re avoiding the BIG negative—huge interest charges—by always paying off your full balance each month.

The debit card, on the other hand, seems pretty darn dull. No rewards. No extended warranties. No interest-free short-term loan. Boring! So, why do some financial experts push you to use your debit card more often in place of your credit card? Because they’re on the front line and they’ve seen that credit cards play mind games on us—card tricks, so to speak.

Credit cards and debit cards both reduce the pain of spending more than cash does. And that’s not good. Feeling some pain when you spend is important because it alerts us that something may be wrong. It makes us think. It makes us slow down. That’s well documented and discussed. But what’s less often discussed is that credit cards have an even stronger effect on spending. Because they introduce a time gap between purchase and payment and consolidate all purchases onto one bill, credit cards make it easier not to think about the cost of each individual purchase at the time of buying than debit cards do. Researchers studying this have come up with the term “payment transparency.”

The less transparent the outflow of money, the less people feel the pain of paying. Credit cards are about as non-transparent as it gets—swipe now, see some number on a statement later. Credit cards are the ibuprofen of spending—they dull the pain. Too effectively. But here’s what’s even weirder. A 2021 MIT study, they’re smart there, says credit cards can actually create a positive feedback loop in people’s minds that encourages spending. Forget just dulling pain, functional magnetic resonance imaging has found that using a credit card can actually activate the reward-related regions of the brain. Dopamine. Uh-oh. That can cause us to step up the spending gas. Yes, dangerous for all of us, especially those people prone to impulse buying. Look, here’s the thing: people yell at me, “Dave, I always pay my balance off immediately and I don’t spend recklessly and I want my two-ish percent in rewards.” But when I convince them to go debit card only for a month, they almost always spend way less. Forget 2% back, we’re sometimes talking 10 to 15% less spending. Pick a card, any card, but think of this video before you do.